Tech entrepreneurs, investors wrestle with the copycat power that giant firms have

It is a classic startup story, but with a twist.

Three 20-somethings launched a firm out of a dorm room at the Massachusetts Institute of Technology in 2016, with the goal of using algorithms to predict the reply to an e-mail. In May, they were fundraising for their startup, EasyEmail, when Google conducted its annual conference for software developers and announced a tool similar to EasyEmail's.

Filip Twarowski, its boss, sees Google's incursion as "incredible confirmation" they are working on something worthwhile. But he also admits that it came as "a little bit of a shock." The giant has scared off at least one prospective backer of EasyEmail, because venture capitalists try to dodge spaces where the tech giants might step.

The behemoths' annual conferences, held to announce new tools, features, and acquisitions, always "send shock waves of fear through entrepreneurs," says Mike Driscoll, a partner at Data Collective, an investment firm. "Venture capitalists attend to see which of their companies are going to get killed next."

But anxiety about the tech giants on the part of startups and their investors goes much deeper than such events. Venture capitalists, such as Albert Wenger of Union Square Ventures, who was an early investor in Twitter, now talk of a "kill-zone" around the giants. Once a young firm enters, it can be extremely difficult to survive. Tech giants try to squash startups by copying them, or they pay to scoop them up early to eliminate a threat.

The idea of a kill-zone may bring to mind Microsoft's long reign in the 1990s, as it embraced a strategy of "embrace, extend and extinguish" and tried to intimidate startups from entering its domain. But entrepreneurs' and venture capitalists' concerns are striking because for a long while afterward, startups had free rein. In 2014, The Economist likened the proliferation of startups to the Cambrian explosion: software made running a startup cheaper than ever and opportunities seemed abundant.

Today, less so. Anything having to do with the consumer internet is perceived as dangerous, because of the dominance of Amazon, Facebook and Google (owned by Alphabet). Venture capitalists are wary of backing startups in online search, social media, mobile and e-commerce. It has become harder for startups to secure a first financing round. According to Pitchbook, a research company, in 2017 the number of these rounds were down by around 22 percent from 2012.

The kill-zone operates in business software as well, with the shadows of Microsoft, Amazon and Alphabet looming large. Amazon's cloud service, Amazon Web Services (AWS), has labeled many startups as "partners," only to copy their functionality and offer them as a cheap or free service. A giant pushing into a startup's territory, while controlling the platform that startup depends on for distribution, makes life tricky. For example, Elastic, a data-management firm, lost sales after AWS launched a competitor, Elasticsearch, in 2015.

Even if giants do not copy startups outright, they can dent their prospects. Last year Amazon bought Whole Foods Market, a grocer, for $13.7 billion. Blue Apron, a meal-delivery startup that was preparing to go public, was suddenly perceived as unappetizing, as expectations mounted that Amazon would push into the space. This phenomenon is not limited to young firms: recently Facebook announced it was moving into online dating, causing the share price of Match Group, which went public in 2015, to plummet by 22 percent that day.

It has never been easy to make it as a startup. Now the army of fearsome technology giants is larger, and operates in a wider range of areas, including online search, social media, digital advertising, virtual reality, messaging and communications, smartphones and home speakers, cloud computing, smart software, e-commerce and more. This makes it challenging for startups to find space to break through and avoid being stamped on.

There are some exceptions. Airbnb, Uber, Slack and other "unicorns" have faced down competition from incumbents. But they are few in number and many startups have learned to set their sights on more achievable aims. Entrepreneurs are "thinking much earlier about which consolidator is going to buy them," said Larry Chu of Goodwin Procter, a law firm. The tech giants have been avid acquirers: Alphabet, Amazon, Apple, Facebook and Microsoft spent a combined $31.6 billion on acquisitions in 2017. This has led some startups to be less ambitious. "Ninety percent of the startups I see are built for sale, not for scale," said Ajay Royan of Mithril Capital, which invests in tech.